Half of the major bond insurers have been in the headlines for negative reasons in recent weeks and their troubles could pose problems ahead for the bond markets they are so entrenched in. Monolines' involvement in the market runs deep, particularly in certain sectors such as autos, home equity lines of credit and multi-sector collateralized debt obligations. Overall, the U.S. structured finance market has a whopping nearly $400 billion in exposure to the four largest monolines, suggesting any rating changes--even a one notch downgrade from triple-A to double-A of any of the big four--could have severe ripple effects throughout the market.
"It could clearly create some serious waves within the market," said Rick Mayfield, portfolio manager at Metropolitan West Securities in Los Angeles, which holds more than $1 billion in wrapped paper, referring to a downgrade. He added: "It's more on our radar than it's been in the past."
MBIA's troubles have created the biggest stir. The Armonk, N.Y.-concern is being investigated by and has received subpoenas from New York Attorney General Eliot Spitzer for accounting and insurance reasons. Shares of Ambac Financial Group, meanwhile, dropped about 15% in one day late last month when it lowered its growth estimate for the year and said it will no longer provide earnings estimates because the markets it plays in are too unpredictable. And just last Wednesday, the credit outlook on Radian Asset Assurance's ratings were put on negative outlook, from stable, by Fitch Ratings.
Of course, the benign credit and low-rate environment in recent years has led the overall share of monoline-wrapped deals to decline as part of the overall market, as investors are more comfortable taking on senior-subordinated paper and want the extra yield afforded by unwrapped paper. And despite concerns about MBIA, the consensus among market participants is it will retain its triple-A rating.
In the short term though, spreads could be hit.Lehman Brothers analysts wrote in a report last week they predict spreads in HELOCs, for example, to widen by up to three basis points versus traditional home equities. And although the HELOC market is relatively small, it is most at risk as 85% of outstanding securities are wrapped in some form, with MBIA providing 55% of those guarantees, according to Lehman.
